The paradox of digital payments

The paradox of digital payments
At Celent we run a couple of Banking research panels – one on Branch transformation and another on Digital – where any US-based bank or credit union can participate in surveys we administer on a regular basis. Last week we published the report with findings of our survey we conducted in November 2015 on Digital Payments. 42 institutions participated and answered our questions on:
  • How important are digital payments in the context of other priorities?
  • What has been the industry’s experience with digital payments?
  • Where is the industry in its EMV migration journey?
The survey results highlighted the paradox of digital payments:
  • Nearly everyone thinks that digital payments are important, but only 13% view it as strategic priority, aim to lead and invest accordingly. 63% aim to be fast followers and another 23% only invest to stay on par with peers.
  • 71% of participants agree that financial institutions (FIs) should offer branded digital payments (e.g. own digital wallet), but they are more likely to participate in third party wallets, such as Apple Pay, Android Pay and others, than to invest into their own HCE wallets – 46% have no plans for HCE.
So, what should the FIs do in digital payments? Accept that “payments are disappearing” and focus on ensuring that their payment credentials are available for customers to use wherever they want them or fight back with their own branded wallets? Does it have to be an “either/ or” choice? Can they/ should they do both? What are your thoughts? P.S. Our panels are open to any FI in the US – Celent clients and non-clients – and we share the results report with all respondents. If you’re a banker and would like to participate in future Digital Panels, please contact

Banks and Fintech: friends or foes?

Banks and Fintech: friends or foes?
The question in the title of this post has become a rather hot topic lately. Earlier this week, I was kindly invited to join the panel on “what’s hot in Fintech” at Citi’s Digital Money Symposium, and it was one of the central questions we debated as a group. My colleague Stephen Greer has also discussed Bank-Fintech relationships on these very pages, for example, see here and here. The question is not necessarily new. Back in 2011, I wrote a report titled Innovative Payment Startups: Bank Friends or Foes? In the report, I looked at companies presenting at the inaugural FinovateEurope and concluded:
“Banks have little to fear from this particular group of payment innovators. Some solutions actively support the established payment systems, in particular cards. Others are expanding the market by enabling payment transactions in places where they may not have been possible before.”
There is no question that the pace of innovation has increased in the last five years since that quote. However, today we also have many startups and Fintech companies that are actively serving banks with their technology tools (from authentication and fraud management to back- and middle-office systems). Others, such as Apple partner with banks to develop propositions that “wrap around” a card transaction. In the last few months, we have also noticed an increase in stories around collaboration between banks and Fintech. Most payment unicorns (private companies with valuation of over $1bn) achieved their impressive scale and valuations mainly by competing with banks in a specific niche and focusing on being the best in class in that area. Often, it is in merchant services, such as those provided by the likes of Stripe, Adyen, Square, and Klarna, while TransferWise is successfully attacking banks in the international payments market. Yet, even among the unicorns there are those that have chosen to partner with banks, such as iZettle which has partnerships with Nordea, Santander, and other banks in Europe. TransferWise, a unicorn that has long been positioning as an alternative to banks, is now partnering with LHV, an Estonian bank, to offer its service via the bank’s online and mobile channels, and is rumoured to be in discussions with “up to 20 banks” about adopting its API. The Wall Street Journal recently quoted Ben Milne, the CEO of Dwolla, as saying, “Time humbles you. Working with banks is the difference between running a sustainable business and just another venture-funded experiment.” It has become fashionable to pronounce the death of banking. The disruption caused by Fintech is supposed to blow the old-fashioned banks out of the water. Of course, we acknowledge the disruption and recognise that banking is changing. We simply don’t agree that banks will disappear — at least not all of them:
  1. Today’s smartest banks will figure out a way to stay relevant for their customers.
  2. Some of today’s disruptors are becoming banks (e.g. Atom, Mondo, Starling in the UK)
  3. Both Fintech and banks are starting to acknowledge the value they each bring to the relationship and will learn to collaborate effectively.
My colleague Gareth Lodge and I have just published a series of reports on reimagining payments relationships between banks, retailers and Fintech. Commissioned by ACI Worldwide, the reports take a perspective of each party and explore this topic in a lot more detail. Just like a family is locked into a set of relationships, banks, retailers, and FinTech form a payment ecosystem that we believe is more symbiotic than many would want to admit.

As conference season rolls on, here’s what I’ll be looking for at Money20/20

As conference season rolls on, here’s what I’ll be looking for at Money20/20
We’re smack in the middle of conference season and the team has been traveling all over the world. We’ve been busy with Sibos and BAI (unfortunately held at exactly the same time), AFP, and next week, Money20/20.  In only its fourth year this new conference had to move to a new venue so that it could avoid running afoul of the fire marshal. Given the excitement around the payments ecosystem, we think it will be an exhausting whirlwind of a week. What will Zil Bareisis and I be looking for? Three main topics top the list:
  • What’s the view on blockchain? There was a lot of discussion at Sibos on the corporate side (we don’t think retail will be leading), but we’d like to find out if there’s heat behind the light.
  • What sort of value added services around the payment are in production or on the drawing board?
  • Is the apparent stall in mobile payments adoption temporary, and what can be done by ecosystem participants to jump-start it?
There will, of course, be many other payments topics covered, and we’re looking forward to plunging in to soak up the zeitgeist. What will you be looking for? If you’ll be in Vegas next week, we look forward to seeing you. If you still haven’t registered, you can get $250 off your ticket by using the code celen250.

P2P lending makes it to main street?

P2P lending makes it to main street?
Can old dogs learn new tricks? What about banks? Banks are trying; not only by making interesting bets around digital but also social. On the social aspect of banking, Banco Colpatria in Colombia offers credit cards to individuals using Lenddo’s social scoring. Lenddo has created and extensively tested an algorithm that analyzes the connections of people in their social networks to determine their character and willingness to pay. Lenddo is leaving behind its start-up origins as a micro-lender and entering into partnerships with financial institutions to take advantage of this scoring which can extend the traditional loan customer base to include new segments with no credit history (college students for example). In this same line, Banco Galicia in Argentina has a very interesting offering – Galicia MOVE – aimed to college students based on a totally digital proposition, underpinned by the use of digital channels and a targeted marketing strategy. Galicia MOVE includes a savings account, a debit card and a credit card. Jumping into social based propositions is just around the corner for them. Clearly, digital and social are terms that go together and could certainly benefit those banks that want to bet on these. Another look at the same issue is that it seems inevitable that banks begin to incorporate business models that otherwise threaten their own business from the periphery. Change or die. Peer to Peer (P2P) lending is one of those situations and banks have started to experiment with it, taking P2P lending to main street. Santander Bank through a lead generation model in partnership with Funding Circle’s and RBS using a 3rd party platform are perhaps the most significant cases right now, but we are aware of more movements in this direction. Banks are certainly not playing hide and seek with P2P lending. In our research, our conversations with key financial industry stakeholders and as collaborators at bringing together banks, fintech start-ups and VCs, P2P lending appeared as an area that banks should explore to attract customers through a different value proposition. P2P lending provides a way for the bank to acquire customers not covered by their traditional offering while making some money in the process and retaining a customer that can eventually move into financial products from traditional banking as their business / financial condition makes them a subject fit for bank credit. Regulation is an important issue for banks to get into P2P lending and depending the country, there may be restrictions. Perhaps the P2P lending company that has best understood and dealt with this issue so far is Afluenta; working with regulators in each country to adapt its model and operate under authorization of the financial regulator. For example in Argentina it was the first P2P lender to operate with the approval of the regulator, under a trust structure where Afluenta administers the trust and the money is out of its estate. Money is owned by lenders (peers), which is in the spirit of the P2P proposition. From my point of view in order for banks not to get trapped between their traditional business model, processes and restrictions imposed by the regulator there are some models that banks can explore before deciding to dive into P2P lending all by themselves: lead generation as Santander, a partnership to use the platform of an existing player or possibly an acquisition of an existing player (as BBVA did with Simple to speed up in the digital race). The end game will have banks incorporating services based on digital and social, leveraged by the use of data. I believe it will have them as main actors, therefor competing directly with the fintech-startups, such as the P2P lending companies. In the meantime, coexistance may be possible. Because I also wanted the view from someone working in the heart of this business I spoke with Alejandro Cosentino, a seasoned financial services executive and founder of Afluenta, who until now remained very skeptical about banks entering into the P2P lending space. Nevertheless he believes in its potential: since launching, Afluenta started to transform personal finances into the greatest and most participating peer-to-peer lending community across Latin America with AR$ 25M, 1300 loans, +90,000 investments transactions and covered +1,000 in social networks, blogs, news and traditional media. Afluenta originates loans at a cost which is 25% of the cost incurred by a bank. In Mexico he believes that loans could have a return of 12% against 3% which is the return for money invested by an individual in a bank. Following some of his impressions, which he gently accepted to share with you and me. P2P lending is first and furthermost a financial business and only then a technological business. Many P2P companies approach it the other way round and that is why they fail. P2P lending has to be played in a (highly) regulated and complex environment where you need to understand what risk management is about. This is why he works on 3 key issues (in order of importance):
  1. Regulation
  2. Credit
  3. Technological
He recognizes having been recently contacted by banks looking to enter the P2P space but in his opinion central banks, regulators and securities commissions will not easily allow banks to enter directly into this market. Authorities are not concerned about the systemic risk; their main concern is banks’ responsibility regarding delinquent or bad credit. In the heart of this issue is who owns the risk? who owns the money? the bank or the peers? Authorities’ view, he says, is that if a bank is in the business it will have to take the risk of delinquency or bad credit because they are trustees of that money. This is the view in Mexico, where P2P lenders have to constitute SOFIPOs (micro-finance institutions), not representing the true spirit of P2P lending because risk is taken by the financial institution and not the peer. With such a framework of legislation it is understandable that banks don’t find P2P lending attractive. The Mexican regulator is expected to review the legislation to provide a better framework to operate P2P lending by August 2015, though he believes it will take some more time than that. The issue of addressing the business without financial expertise, including poor risk management, has some P2P companies working with credit delinquency over 26 % (100 loans over 350 loan portfolio with debt for more than 90 days), making it unbearable . Afluenta instead has less than 3% with a much larger volume of loans. They have analyzed loan portfolios from banks and there have been cases where, based on their P2P lending underwriting, they would have not granted loans (which subsequently became delinquent), showing the level of intelligence and accuracy in risk analysis capable of being used in P2P lending. From his perspective banks are tepid regarding P2P lending. It is not a general trend or something that comes as a strong directive from top management, even though some banks are engaging for the sake of innovation or because they still have doubts about the future of P2P lending but don’t want to just watch the ship sail out of the harbor, in case the journey ends being successful, with them not on board. Alejandro believes that the way to go for banks interested in taking a shot to this market is through a model where they act as an online trading agent, going from lead generation to a more stronger partnership where they can direct their own institutional investments through the P2P platform. An Argentinean insurance company for example has agreed to use his P2P platform as a vehicle to directing investments, having a preferred option to finance the cases submitted by peers. An acquisition by a bank is possible if the P2P entity stays separate from the bank, otherwise it will face the regulation problems he described above. You can believe banks are still tepid about P2P lending as Alejandro does, or that it is already hitting main street, which is what I believe. Whatever you choose to believe, rest assure that banks will not play hide and seek about P2P lending. The time to get this bull from the horns has come.